UPDATE 2-Starbucks seeks acquisitions to boost grocery plan

* CEO eyes acquisitions for consumer goods growth

* Arbitration with Kraft has begun; break-up looms

* Says speculation fuels “tragic” coffee price spike

* Shares up 3.6 percent
(Rewrites, adds executive comments, byline)

By Lisa Baertlein and Martinne Geller

NEW YORK, Dec 1 (BestGrowthStock) – Starbucks Corp (SBUX.O: ) laid
out an ambitious strategy for growing sales beyond its cafes,
saying it would look to expand its packaged goods business
through acquisitions.

Starbucks’ brass believe its packaged coffee, bottled
Frappuccino, Via instant coffee and other products sold in
grocery stores can grow faster than sales at its 17,000 retail
cafes around the globe.

The coffee chain plans to accelerate that growth by taking
a bigger role in that business, which includes cutting ties
with Kraft Foods Inc (KFT.N: ), its distributor of Starbucks
coffee to supermarkets for the past 12 years. [ID:nN29193436]

Chief Executive Howard Schultz said at an investor meeting
in New York that Starbucks would become “a new kind of company”
that takes advantage of its network of ubiquitous cafes,
grocery partners and customer loyalty.

Schultz said Starbucks was open to buying large and small
companies that would build its consumer products portfolio.

“Inorganic growth will be a bigger part of our future than
it has been over our previous 10 years,” said Chief Financial
Officer Troy Alstead, referring to acquisitions.

Shares in the company rose 3.6 percent.

The plan is to debut new food and drinks in cafes for
customers to sample, then roll them out to grocers and
restaurants, then to hotels. Starbucks uses this model for its
year-old Via instant coffee products.

The consumer goods business accounted for only 7 percent of
Starbucks’ total revenue of $10.7 billion last year, but the
company said it has healthy margins and room to run.

Frappuccino cold drinks and Tazo teas are billion-dollar
businesses for Starbucks, and it is working to take Via and
Seattle’s Best to that level.

Starbucks currently only sells packaged goods in 10 of the
54 countries in which it operates.

For its cafe business, China will get most of the 400 new
international stores planned this year and will dominate growth
for many years to come, CFO Alstead said.

Schultz also said it was “tragic” that speculation in the
coffee market, rather than bean shortages, was to blame for the
recent rally in coffee prices.[ID:N01566125]

KRAFT BREAKUP LOOMS

Executives tiptoed carefully around Starbucks’ messy
break-up with Kraft. The companies are in arbitration, Alstead
said. [ID:nN29193436]

(For a graphic on the Starbucks-Kraft partnership, click on
http://r.reuters.com/dyf97q.)

The biggest unknown is how much Starbucks might have to pay
for its freedom from Kraft.

Bernstein analyst Sara Senatore said the value of Kraft’s
business could be around $1.2 billion, excluding any premium
Starbucks may be required to pay Kraft, if arbitrators agree
with Kraft’s position that the contract is perpetual.

If they agree with Starbucks that the pact would have
expired in 2014, the value could be less than $300 million, she
said.

“We would expect an arbitration award to be below the
perpetuity value,” Senatore said, pointing to complaints
Starbucks has levied against Kraft, including that Kraft
mismanaged displays and inventory of its coffee.

The Kraft deal brought Starbucks revenue of roughly $400
million in its fiscal year ended Oct. 3, according to
Starbucks’ annual report.

Starbucks hopes to end its relationship with Kraft in March
2011. Alstead said he expects the grocery coffee and tea
business to add strongly to earnings in 2012 and beyond.

On Monday, Starbucks told Reuters its new partner for the
packaged coffee and tea business would be privately held Acosta
Inc [ACSTA.UL], which in one year helped Starbucks drive Via
sales of about $135 million.
(Reporting by Lisa Baertlein in Los Angeles and Martinne
Geller in New York; Editing by Michele Gershberg, John
Wallace)

UPDATE 2-Starbucks seeks acquisitions to boost grocery plan